Cultural and Political Challenges
Faced with a worsening manpower shortage at home, what Indian software outsourcing firms were looking for when they began to set up software development facilities in China was an abundant supply of low-level software engineering personnel. Looking at the figures for the number of software engineering graduates in China, and attracted by China's low labor costs, they assumed that they would be able to recruit the people they needed within a very short space of time. Unfortunately, the software outsourcing firms did not give sufficient consideration to political and cultural issues; as a result, the development of their China operations has not gone smoothly.
In the political sphere, the Chinese government's main objective in supporting the software industry was to cultivate the growth of domestic software companies, rather than providing manpower for international software corporations. Indian software outsourcing firms operating in China find themselves having to compete for software talent with domestic Chinese software firms.
Cultural issues have also been a major problem. Chinese workers cannot match the English language skills that Indian software engineers possess due to India's history of colonial rule by Britain. At the same time, Chinese college graduates are unwilling to do the low-level work that Indian workers are happy to perform. By assuming that recruitment strategies that had been successful in India would also work in China, the Indian software firms put themselves at a serious disadvantage.
After five years of hard work, Tata has only managed to recruit 800 personnel in China, and the other Indian software outsourcing firms have done even worse. For the time being at least, the Indian software firms' dream of establishing a second software development base in China have come to nothing.
From Workforce Recruitment to Market Development
Tata was the first Indian company to develop the Chinese domestic software outsourcing market, with its establishment of a joint venture in partnership with Microsoft and several Chinese companies. Five years on, the Indian software firms' China operations now account for 40% of the total revenue; the Indian companies are starting to constitute a serious competitive threat to leading multinationals such as IBM in the China market. Rather than seeing China as a source of software engineering talent, the Indian companies are now focusing on developing the business opportunities in the Chinese domestic market.
However, the Chinese government's willingness to trade market access for technology is only a short-term measure. In the long term, China will be looking to build up its own domestic software industry. Indian software companies that fail to recognize this fact will find it difficult to make a success of their China operations.
A Steppingstone to Tap Demand from Japan and Korea
The rapid growth of the global IT sector, and the pressure on enterprises in Europe and the United States to reduce costs, have created huge business opportunities for Indian software outsourcing firms. Benefiting from the experience that they have accumulated over the years, their high-quality, English-speaking workforce, and strong managerial capabilities, Indian companies have established a dominant position in the European and US outsourcing markets. The main strategic objective for the Indian outsourcing providers now is to develop the Japanese market, one of the most important non-English-speaking software outsourcing market in the world. Linguistic and geographical factors have hindered Indian companies' attempts to develop the Japanese market, and recently Japanese companies have begun shifting orders away from Indian outsourcing providers towards Chinese firms. Chinese outsourcing companies cannot yet match the scale of operations of the big Indian firms, and lack first-class quality management processes. Nevertheless, linguistic, cultural, and geographical factors put the Chinese companies at an advantage when competing for a share of the Japanese (and Korean) outsourcing markets. The business models that Chinese software firms have adopted and their rapid learning abilities have also helped them to secure opportunities for collaboration with Japanese and Korean enterprises. In the long term, Chinese software companies pose a significant competitive threat to the Indian software outsourcing firms operating in China. The Indian outsourcing firms' failure to establish software R&D centers in Shandong and Northeast China (which have close links with Japan and Korea) is likely to hinder their development of the Japanese and Korean markets.
Appendix